A Carleton S. Fiorina Finger Exercise

Brad DeLong catches Tim Berners Lee Timothy B. Lee [h/t Bob in comments] being, to be nice, disingenuous:

…The idea was that [HP and Compaq] would be able to do the things they already did more effectively if they joined forces. Management consultants who examined the merger for HP found that (as Fiorina loved to put it) HP and Compaq ‘fit together like a zipper’…

Stop right there: when you are reduced to quoting management consultants hired to make the case for the deal the CEO wants to do, you are demonstrating that you have no good arguments.

Brad is being too nice. Here’s the Daniel Davies-style Finger Exercise:

  1. A CEO runs a company with an annual ROE of X. They are considering buying a company of similar size that (best case) products that might be complementary to—but also modular to—the company’s highest-margin good.
  2. The company to be aquired has a current annual ROE of Y. Y is significantly less than X, and the company’s primary market continues to become increasingly commoditized.
  3. The CEO tells you they are doing this in an attempt to increase the company’s margins (which should in turn increase company ROE).

Quiz:

1) Attempt to specify an algorithm that can justify your claimed expectations. Caution: use of negative coefficients is not permitted.

Use your results to answer the following questions:

2) Is there anyone with math skills greater than the average third-grader who couldn’t see at the time that this was sheer idiocy?*

3) Would you be surprised if that CEO were fired and never again offered the opportunity to run a company of any size?

Bonus Question:

4) Even granting West Coast bias, why would anyone looking at Fiorina’s performance at Lucent have been silly enough to offer her the job at HP in the first place?

*Exclude Carleton S. Fiorina and Michael Eisner from possible answers

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